How Russia Can Save Cyprus and the Euro (for a Steep Price)

People queue up to make a transaction at an ATM outside a branch of Laiki Bank in Nicosia March 21, 2013.
(REUTERS/ANDREAS MANOLIS)

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The government of Cyprus has until Monday to figure out how to raise 6 billion euros worth of emergency funds or the European Central Bank will pull the plug on their end of the bailout deal. The original fundraising plan—taxing the bank deposits of everyone who has money there—was loudly denounced. That leaves Cyprus's one and only backup plan in the hands of the one country you probably don't want to be in hock to: Russia.

In the middle of this new financial crisis, Cyprus's finance minister, Michalis Sarris, did not go to Brussels or Berlin to asking the European Union if it could possibly spare more money. Instead, he's in Moscow, asking Russia's state development bank to make an "investment" to support the Cypriot bailout. Wealthy Russian investors love to stash their money in Cypriot banks, so the government and even some private banks are inclined to help. But that doesn't mean they can't take advantage of the opportunity to wring some serious concessions from the island nation. Selling access to some of Cyprus's offshore gas reserves would be a good start. Turning one of their Mediterranean Sea ports into a Russian naval base would be even better.

The Greek news site Ekathimerini reported yesterday that the idea of a Russian naval port might be one of the concessions that Russians are seeking in exchange for bailout funds. A move like that would likely infuraiate Turkey, which has no interest in sharing both its maritime borders with the Russians. But unless the Europeans decide to pony up more money to block Moscow's influence, Russia is likely to emerge as the big winner from this whole fiasco.

That leaves the region in a complicated three-way dance, with Cyprus bouncing Russia and the European Union off each other, in hopes of securing the best possible deal. The EU doesn't want Cyprus to fail, but it also doesn't want to give Russia a bigger foothold in the Mediterranean. Russia doesn't want to pour billions of dollars into an already troubled economy, but it can't pass up the chance to control a potentially lucrative natural gas resource. A failing nation dropping out of the euro zone undermines the credibility of the whole European experiment, but so does relying on a non-euro nation play the hero.

And Cyprus just wants to survive. The economic leaders there probably would prefer their bailout funds to come from Europe and not Russia, but at this point they don't have much choice but to give Moscow what it wants. The only other option is "attempted euro suicide," dropping out (or threatening to drop out) of the eurozone altogether and taking their chances.

Meanwhile, the favorite sport of journalists covering the crisis is to snap photos of the increasingly long lines to get cash of Cypriot ATMs. The banks aren't physically running out of cash just yet, but since the branches themselves have been closed since last week, it's the only way to get access to your money.